Hold on to your hats. Investing could be about to get very ugly again, writes The Motley Fool.
Europe is in a mess, with Deutsche Bank chief executive Josef Ackermann saying some European banks could be 'killed off' by the latest sovereign debt crisis.
Charlie Aitken of Bell Potter said "It appears we have credit crisis part 2 on our hands here, but this time Europe is the centre of the crisis."
The worst possible time
Stating the obvious, it doesn't bode well for the share market. On the bright side, the chances of the Reserve Bank raising interest rates in September are precisely zero.
Coming on top of a poor August jobs report in the U.S., and fears the world's biggest economy could slump back into recession, the latest European crisis couldn't have come at a worse time.
Not surprisingly, investors have flocked to the so-called safety of gold, pushing its price past US$1,900 an ounce for only the second time ever. We think they're making a big mistake, but right now, what we think doesn't matter.
The Australian share market has already slumped 18% from its April high, putting it firmly in bear market territory. Coming so soon after the GFC, it's yet another blow for the weary investing public.
In the coming days and weeks, we can expect more headlines like the Australian Financial Review's "Is the market just too dangerous for average investors".
Getting greedy
Here at The Motley Fool, we think differently. When others are fearful, we get greedy.
So rather than sell in a fit of panic, we hold on to our shares. We are committed to the stock market for the long-term. Only money we don't need for the next 3 to 5 years, or longer, is invested in shares.
We hope you've been heeding our advice.
Only the over-leveraged are forced to sell — the poor, silly souls. We'd have thought they learnt their lesson in 2008. Margin works wonderfully well on the way up, juicy investing returns, but can totally wipe out portfolios on the way down.
From their pain, we hope to gain. Don't get us wrong. We're not scavengers. We don't wish great losses on people just so we can prosper. We simply like the share prices fear and panic presents to us.
Getting really greedy
Our Investment Analyst Dean Morel thinks shares are cheap right now. But I know he's secretly hoping they get even cheaper.
Take BHP Billiton (ASX: BHP), for example. With the shares down 25% from their April peak, he thinks they are attractive today.
But Dean's a very greedy investor. It's probably the single reason why his personal portfolio has managed to beat the market over a period of many years.
Dean wants to buy BHP even cheaper.
There's nothing wrong with being greedy, mind you. Warren Buffett, the world's richest investor, has made billions being greedy.
Buffett has a simple rule: Be fearful when others are greedy, and be greedy when others are fearful.
With this latest panic-attack, Dean might just get his wish to buy BHP even cheaper. We'll keep you posted. In the meantime, if you want to read all about the Big Australian, check out Prepare to load up on BHP shares.
Help. I'm already fully invested…
Speaking of Dean, we posed this simple question to him…
"What should you do if you're fully invested and the market tanks?"
Over to Dean…
The first thing you should do is panic. That's right I said panic! Run around in circles, flapping your arms and scream, "why, why, why?" Then look for someone to blame, as this surely can't be your fault.
All done? I hope so, as it's important to get that futile activity out of the way. If the market does tank you need your wits about you and a solid plan in place.
The plan
Learn from this mistake. I know you want a solution for your predicament.
But the best solution was to increase cash when the market was riding high. If you had done that, you'd gleefully be cheering on lower prices so you could put that cash to work. This is an invaluable opportunity to learn about the true value of cash.
I know, I know. You still want a solution. You still want an action plan. So here goes.
1. Do nothing. Ignore the market and sooner than you imagine everything will look rosy again.
2. If you've got regular income then keep buying good companies. There are many companies being sold at generational lows of between 2x- 5x EBITDA. Update your watchlist.
3. Only sell to buy something better. Market sell-offs provide a good opportunity to upgrade your portfolio. Do not sell out!
4. Focus on value not share prices. If you do that you may see opportunity instead of misery.
The Foolish bottom line
If you're a long-term investor, you need to have the intestinal fortitude to stick at it in good times and in bad times.
More than that, if you have the guts to buy when all others are selling – when shares are at their cheapest – the chances are you'll be one of the relatively few very successful investors.
If investing was easy, we'd all be multi-millionaires.
That said, up until 2007, investing was easy. Many ordinary people made thousands of dollars simply by buying, holding and reinvesting the dividends in great companies like Commonwealth Bank (ASX: CBA), ANZ (ASX: ANZ), Woolworths (ASX: WOW) and Wesfarmers (ASX: WES).
Those days are gone.
But that doesn't mean opportunities aren't out there – companies like Maverick Drilling & Exploration (ASX: MAD), for example, and the two companies named in our free report 2 Safe Ways To Play The Commodities Boom. Click here to request your free copy today. You just have to look a little harder, and in different places.
In the meantime, stay calm, and stay tuned.
Of the companies mentioned above, Dean Morel and Bruce Jackson have interests in Maverick Drilling & Exploration. Bruce Jackson also controls an interest in BHP Billiton, Commonwealth Bank, ANZ, Woolworths and Wesfarmers. The Motley Fool has a calm disclosure policy.
